Mortgage market predicted to ease during 2022

Posted on Friday, January 14, 2022

Gross mortgage lending will fall to £275bn this year, down from the £304bn reached in 2021 and signal a return to some semblance of normality in the market, according to predictions made by IMLA.

In last year’s report, IMLA forecast gross mortgage lending of £283 billion for 2021, a surprise to many commentators but ultimately close to the true final total of £304 billion, the best performance for the industry since 2007. IMLA estimates that the total value of housing transactions reached a record of nearly £370 billion in 2021. However, the 2022 New Normal report predicts a decrease in gross mortgage lending to £275 billion this year, with a further fall to £265 billion in 2023.

The report, which makes a series of predictions about the mortgage market over the coming year, observes that the remortgage market will be stronger in 2022, reaching £89 billion, compared to £82 billion in 2021. This is a result of lenders prioritising house purchase lending during last year’s stamp duty holiday, with lower predicted house purchase volumes going forward encouraging lenders to focus more heavily on the remortgage market.

However, IMLA forecasts that gross buy-to-let lending will fall back from £44.5 billion in 2021, to £38 billion in 2022 and £37 billion in 2023. Whilst buy-to-let landlords took advantage of the stamp duty holiday last year, IMLA predicts that higher interest rates and broadly flat house prices will dampen buy-to-let house purchase demand.

More widely, whilst housing market performance will be adversely impacted by the higher interest rates prompted by the need to curb post-Covid inflation rises, the effect is likely to be tempered by several factors. Firstly, bond markets are continuing to signal that interest rates will remain historically low for the foreseeable future, with the yield on 50-year UK gilts at 1.0%, despite market expectations of short term rate rises. The decline in long term interest rates should ensure that longer-term (5-year plus) fixed-rate mortgage rates do not rise too much. Secondly, the market continues to exhibit a shortage of supply – near-record-low levels – which will underpin house prices and prevent a significant fall in aggregate prices.

Regarding distribution, intermediaries are set to remain the dominant channel, serving nearly 80% of the market. While IMLA expects the intermediaries’ share of distribution to drop very slightly in 2022 and 2023, it forecasts that this too will remain near record levels – just below 80% of mortgage advances by value.

IMLA welcomes the Bank of England Financial Policy Committee (FPC) decision to consult on withdrawing its stressed affordability requirements. IMLA has been calling for a review of the affordability stress test for some time, and the removal of the 3% stress in the affordability calculation, should it occur, would result in more borrowers being able to meet the challenge of buying in 2022 and beyond.

Kate Davies, Executive Director, IMLA comments: “2021 was a highly successful year for the mortgage market despite the difficult conditions created by the pandemic. Lenders have responded remarkably well to the difficulties presented by COVID-19, particularly given the operational pressures created by a time-limited stamp duty holiday. IMLA estimates gross mortgage lending in 2021 will have reached £304 billion, the best performance since 2007, driven by the stamp duty holiday and by unprecedented fiscal and monetary support from government.

“It should come as no surprise that 2022 is set to be more subdued, especially with Covid related government support likely to come to an end. Despite this, the remortgage market is well placed to thrive in the coming year and, while interest rates may rise, mortgage rates will remain close to the all-time lows of 2021.

“We’re also pleased to see that the drive and innovation of UK intermediaries continue to be reflected in the share of distribution across the market, with 80% of the market now being served by this channel.

“However, looking ahead through 2022, we shall continue to press for a coherent, long-term housing strategy from the government, including the promised delivery of hundreds of thousands of new homes for a new generation of homeowners. Lenders will continue to develop and engage with schemes to replace the Help to Buy scheme, which comes to an end in 2023, and thus continue to help first-time buyers achieve their dream of homeownership.”

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